Thursday, March 22, 2012

DFM Foods Ltd - Munching along

DFM Foods Ltd. is engaged in the business of branded packaged snacks.

Till about 3 years back, the company was also into the wheatstorage business. Subsequently this line of business was discontinued and now (since the last 2 years ) DFM is a pure ‘branded food’ company.

DFM pioneered the entry of packaged snacks in the Indian market with the introduction of its ‘Crax’ Corn Rings in 1984.

Ownership and Management

The business is headed by Mr. Mohit Jain, Managing Director and his two sons, Rohan and Rashad Jain. A per exchange filings, the promoter own 69.02% in the company. There are 2 other shareholders under the ‘Public’ category who have been together owning a little under 12% of the equity for the last few years .

Product range:

Corn Rings and Wheat Puffs are marketed under the ‘Crax’ and ‘Natkhat’ brand names respectively. Both these are extremely popular snacks, especially among children.

The fact that the product are baked and not fried also means a significantly lower fat content making it a healthier snack.

In the namkeens segment, company offers a complete range of products consisting of 13 distinct product variants that include Bhujiyas, Daals, Mixtures and Nut-Mixes. These are sold in several pack sizes to cater to both casual / impulse consumption as well as consumption at home.

Production & distribution:

The Company’s corporate office is located at Roshanara in New Delhi. Manufacturing set up is located at Ghaziabad. A new plant has very recently ( 2-3 months back) commenced production at Greater Noida. Post this, production capacity has doubled.

The company has established an effective distribution system covering most of North India. Distribution network currently spans the states of Delhi, Uttar Pradesh, Punjab, Haryana, Uttararnchal, Himachal, Jammu & Kashmir, Rajasthan and Madhya Pradesh. Expansion into the Western Region is in progress and partial distribution set up is in place in Mumbai & Pune. To put it mildly,the respone has been encouraging,

Last year the company sold everything that it producedat 100% capacity utilization. So;clearly, product acceptance and demand are in place ( in the existing market of North and Central India). Consumer response in Mumbai & Pune since the launch about 6 month back has been very good. The current chink in the armour is the lack of a strong pan India distribution set up. The company is focusing on deeply penetrating its existing markets and also entering new geographies.

Financials:

Equity: 10 cr

Debt: 62.25 cr ( as of sept 30,11)

Year ended March 31, 2011

Revenue: 121 cr

PBT: 12.71

PAT: 8.32

EPS: Rs. 8.32

Dividend: Rs.2 per share

9-month ended Dec 31, 2012

Revenue: 119 cr ( 38% growth yoy)

PBT: 12.9 ( 53% growth yoy)

PAT: 8.71 ( 51% growth yoy)

Indian snack food industry:

India's snack food industry is estimated to be worth $3 billion and growing at about 25-30%. Within this, the organized segment - is believed to be worth $1.5 billion .

Sequoia Capital India has invested $30 million ( Rs.145 cr) in Indore-based Prakash Snacks Pvt Ltd for an undisclosed minority stake (speculated to be in the region of 30%) in June 2011. Prakash Snacks had sales of 154 cr in 2010-11.

Rajkot-based Balaji Wafers (owned by local entrepreneur Chandubhai Virani and his family) has an estimated turnover of Rs 450 crore. Virani, who started his venture in early 1980s by selling sandwiches in a cinema hall near Rajkot and then diversified to home-made chips, has been keenly sought-after by Frito-Lay. Balaji was willing to dilute only a minority 30% stake to Frito-Lay, but they were keen to acquire 51%-plus share. So, after several round of negotiations lasting for close to two years, the talks broke down a year back

.

Pepsi Frito Lay had acquired Uncle Chipps for about $ 6.6 million 12 year back from Amrit Agro.

Catalysts:

Smooth and accelerated roll out of distribution network in geographies where the company is currently partially present or lacks presence.

Consolidation in the industry wherein one of the regional players is bought over by Pepsi or ITC or a new MNC entrant.

Tie-up ( DFM) with a FMCG major for distribution/equity participation.

Ability to maintain sales growth at a CAGR of30% over the next 3 years.

Valuation:

The stock is currently traded at Rs.216 at a PE of 18 vis-à-vis expected EPS of R.12 for the current year. There are no listed pure play branded snack food investment opportunities available in the market currently. So, though on a traditional PE scale, the stock might appear a wee bit expensive, it is but a reflection of the expected growth rate in the branded snack food segment and also to a degree scarcity premium.

At the time of writing this report, the author /his family have an investment interest in the stock mentioned above. Under no circumstance does the information in this report represent a recommendation to buy or sell the above-mentioned stock. This report has been prepared and issued on the basis of publicly available information, internally developed data & other sources believed to be reliable. This is just a suggestion solely for information purposes and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Readers using the information contained herein are solely responsible for their actions and are advised to satisfy themselves before making any investments.